01-Dec-2017 written by : FSI-Team
Buying insurance is an important aspect of financial planning and is a decision that must be taken after careful analysis and comparison. While insurance is something that an individual actively seeks to buy, credit history is something that is generated over the course of time due to the way an individual’s attitude towards debt and his treatment of his loans and credit cards.
Both aspects are individually important and do impact a lot of things in an individual's life; however is there a correlation between credit score and insurance? Let us bust a few myths that may be related to these two aspects.
Often people assume just like payment of credit card dues and loans, insurance premium payments also impact the CIBIL score calculation. Payment record of loans and credit card impact the credit score calculation along with four other factors that relate to credit cards and loans. The repayment history is the biggest contributor to the score and has a 35% weightage in the score calculation. Insurance premiums may be paid annually or semi-annually as the case may be; not paying the premium on time could result in the insured facing a penalty for late payment or in some cases the policy may also lapse. Paying insurance premiums on time will not have a positive impact on the credit rating and not paying them on time will not result in any adverse effect on the credit rating. In a lot of economies utility bills payments (electricity, telephone, and mobiles) are also included when one is calculating the score but this does not happen in India so far.
Just like there is credit score to predict the likelihood of a person defaulting on paying their dues there are credit-based insurance scores that indicate the likelihood of an insured filing for a claim. The normal credit rating assesses the risk profile of an applicant and the credit based insurance scores predict the probability of a loss that would occur to the insurer when the person buying the policy files for a claim. If an applicant were to apply for a loan for low CIBIL score, then he/she will likely be expected to pay higher rate of interest on loans. Similarly a person with a low insurance based credit score will be expected to pay higher insurance premiums then a person who has a better score. It is important to remember here that often insurers will not actively state that the premium is affected by credit rating but they still do access the credit report of individuals which along with many other factors impact the premium for the insurance.
Those who are aware about credit based scoring may assume that the normal credit score that is used by lenders to accept or reject your loan/credit card application is used for calculating the insurance premium also. However this is not the case; insurance companies though base the calculation on the information contained in the credit report but the score is aimed at predicted something different. The insurance based score unlike the credit score aims to estimate the probability of a loss or a claim. The score is just one of the various factors that will impact the premium and the basic rules of following good credit behavior are likely to result in good scores whether for the purpose of taking a loan or buying an insurance policy.